Are You Protected From A Deficiency Judgment After A Short-sale?

As troubling it is to lose your house to foreclosure, borrowers may still be on the hook for the deficiency amount. It is the difference of what's owed on the home loan and what the bank could sell for at an auction. "Deficiency judgments" can hurt ex-homeowners years after they have lost their property.

It can happen to homeowners who have achieved short-sales where the bank had approved selling the home for less than what it was worth.

Vanessa Corey who made a short-sale on her Fredericksburg, VA home in April of 2008 is a real life example. After building her house in 2004, unforeseen setbacks which led to a bitter divorce coupled with the economic housing crisis forced her to sell the house through a short-sale arrangement.

As a property agent, she assumed the lender had agreed to disregard the difference in amount owed after the short-sale. Late last year, her legal representative produced a letter from her lender with a demand to pay an owed amount of $65,000. As she didn't have the money, she declared bankruptcy.

Numerous banks choose not to make statement about the subject of 'deficiency judgments'. Corey's bank, BT&T confessed that they were going after more borrowers with deficiencies.

How Do You Avoid A Deficiency Judgment? It depends on which state the homeowner resides in. Other things include if the borrower has a second mortgage or other liens. It can definitely hurt homeowners if they disregarded the issue altogether.

According to Richard Zaretsky, a certified real estate attorney in West Palm Beach, Fla, once your lender has a judgment on you, they can come after you irrespective of where you live. They can request for your financial records, have your wages garnished and place you in jail if you fail to respond.

Banks can go after deficiency judgments in more than thirty states. The U.S. Foreclosure Network states that Florida, New York and Texas are among these states.

Fortunately in places like Arizona and California, they do not permit 'deficiency judgments'. The other ten states that do not allow such judgments are Iowa, Alaska, North Dakota, Montana, Pennsylvania, Oregon, Washington, Wisconsin and South Carolina.

As financial institutions are likely to agree in forgiving the deficiency amount, many ex-homeowners do not know that they are needed to opt for a release. This can be done by having your legal representative demand a release from your financial lender.

Zaretsky says that homeowners should not take things for granted assuming that a deficiency judgment will not return and hit them. He believes that many of these judgments will be pursued over several years to come. It is important to note that these accounts were sold at a loss to various collection firms and third-party investors. These firms would not have purchased these loans if they weren't eager in recovering the amount they paid for them.

Financial institutions or debt collection companies may sit and wait for borrowers to cure themselves from their financial woes before filing for a judgment. Take for instance in Florida state, financial institutions and debt collection companies can wait up to five years to file. Once judgment is received, the organizations will be granted a time span of up to 2 decades to collect the debt with interest.

Financial institutions and debt collection companies can hunt down ex-homeowners in spite of a minor debt. In 2004, Mr. Varno and his spouse achieved a short-sale arrangement with their property after he was laid off from his job. In 2008, to his surprise, the second lien holder demanded 25 K from him. Mr. Varno explained that they had already released the title thus making him not indebted to the 2nd lien holder.

Unfortunately, that was not the case. The release of the title does not mean that the debt will be extinguished. Due to the diverse variations in state laws, in general, a mortgage responsibility consists of 2 parts. The first part is the collateral in which the pledge is the asset or house. The second part is the promise and agreement to pay back the loan.

Lenders may release property liens so as to enable a short-sale transaction but not necessarily releasing borrowers' obligations to pay back the loan based on the promissory notes. Upon the sale of the home, the secured debt can transform into an unsecured debt.

Zaretsky pointed out to one of his customers who went over the mountain when he got a short-sale. He blindly signed away all the papers that his loan agent had given him with the inclusion of a document that made him still legally responsible for the debt.

He was unaware that the financial institution could take that document and transform it into a deficiency judgment through the legal system.

Financial institutions are not very trustworthy or may not be acting on your best interest. Zaretsky explained of a separate borrower who was rich and eligible to pay off the debt. However, the financial institution did not reciprocate as they knew they can later come after him for a deficiency judgment.

Larry Tolchinsky, a Florida real estate attorney said, lenders can occasionally come after borrowers who strategically default (or walk away) if they have other remaining assets.

Banks will research to see if it was a pure walking-away attempt where the borrower truly could not afford to make his or her mortgage payments. If they find out that the borrower has been making timely payments and is in financially sound status, he or she maybe targeted for the deficiency.

If you are unsure, it is recommendable to obtain the services of an attorney to make sure that the debt in the short-sale or deed-in-lieu agreement is negotiated away.